The U.S. Federal Reserve (Fed) raised interest rates by 50 basis points, its biggest increase
since 2000, and signaled that it would continue raising rates at that pace throughout this year to
bring down soaring consumer prices.
The U.S. central bank’s policy-setting Federal Open Market Committee (FOMC) voted
unanimously to increase its benchmark interest rate by half a percentage point.
The Fed also said that it will begin allowing its holdings of Treasuries and mortgage-backed
securities to decline in June at an initial combined monthly pace of $47.5 billion U.S., rising over
three months to $95 billion U.S.
“Inflation is much too high, and we understand the hardship it is causing, and we are moving
expeditiously to bring it back down,” Fed Chairman Jerome Powell said after the decision in his
first press conference since the pandemic began in 2020.
Powell’s remarks ignited a rally in Treasuries and stocks as he dampened expectations that the
Fed is planning an even larger rate increase of 75 basis points in the months ahead, saying that
it is “not something that the committee is actively considering.”
The increase in the target for the federal funds rate, to a range of 0.75% to 1%, follows a
quarter-point hike in March that ended two years of near-zero rates to help cushion the U.S.
economy against the impact of COVID-19.
The U.S. central bank is trying to curb the hottest inflation rate since 1981. Back then, the Fed
raised rates as high as 20% and crushed both inflation and the broader economy in the process.
The Fed’s hope this time is that the combination of higher borrowing costs and a shrinking
balance sheet will deliver a soft landing that avoids an American recession while tamping down
inflation.
Fed officials have so far downplayed that idea. However, several have, in recent weeks,
expressed a desire to bring the benchmark federal funds rate to 2.5% by the end of the year, a
level they deem roughly neutral for the U.S. economy.
Powell said “it is certainly possible” that the Fed decides over time that it will need to move rates
to levels that are more restrictive. “If higher rates are required then we won’t hesitate to deliver
them,” he told reporters.
